If you financially support your church, a charity, or favorite 501(c)3 organization, Donor-Advised Funds may work for you. Here are eight things to know about DAFs to help you decide if they are the right choice for your situation.
1. What is a Donor Advised Fund?
Donor-Advised Funds are charitable investment accounts. DAFs offer immediate tax deductions and the ability to grow investments intended for charitable giving tax-free. Established in the 1930s, DAFs are philanthropy’s fastest-growing, low cost, turnkey giving solution that allow contributors to recommend grants to virtually any IRS-qualified public charity.
2. Funding a Donor Advised Fund
It’s recommended to fund a DAF with appreciated assets such as stocks, land, art, cryptocurrency, etc. Donating assets allows for tax-free growth and provides tax benefits for you. In comparison, cash can be one of the most expensive assets to fund a DAF with. Generally, because assets are first sold, taxed, and then the remaining funds are put in the DAF.
3. The Tax Advantages of DAF Donations
When assets are donated to a DAF, you receive a charitable deduction for the value of those assets. This usually offsets any tax liabilities had you sold the asset first and then donated the proceeds. A good rule of thumb is to donate long-term appreciated assets to get the charitable deduction. Any depreciated assets can be sold for the tax loss and then the cash can be donated to the DAF.
4. Donations to a DAF are Irrevocable
DAF donations are deductible from your income taxes thus making any donations to them irrevocable. The donated assets become the legal control and property of the sponsoring organization (e.g. a foundation or one of the financial service companies such as Schwab, Vanguard or Fidelity). When you make a grant request, it is usually honored, but there’s a chance it could be denied. Hence, they named these accounts Donor Advised Funds, not Donor Guaranteed Grant Funds.
5. There is No Mandated Timeframe for DAF Distributions
Currently, there isn’t any IRS regulation regarding the timeline for distributions from a DAF. So, donors may choose when and how often grants are made.
6. Grants from a DAF can be Anonymous
You may be emotionally moved to act and give when you see a natural disaster affecting a community but don’t want to get on another mailing list if you respond. Grants from DAFs can be anonymous, so you receive the joy from giving without needing the kudos or yet another organization contacting you. Additionally, your individual DAF grants are not reported to the IRS.
7. DAFs Can Be Used to Teach Your Posterity the Why and How of Giving
DAFs allow you to teach your descendants the importance, joy, and carefulness of giving. Here’s how:
Tell your offspring that you’ll take a certain amount of dollars out of your DAF and donate it to a charity of their choosing. First ask them to petition you, as if you were a foundation making the grant on why this organization is worthy of your dollars. The ensuing exercise ought to make them research and learn about the charity and in so doing, deepen their interest in the charity’s work. The joy they’ll experience in giving a larger amount than they could on their own will make them good stewards of their own donations in the future.
8. DAF can be used in Legacy Planning
For those with postmortem charitable intents, a DAF can be funded through a bequest in the will, as the beneficiary of a retirement plan, or recipient of a life insurance policy. Gifts like these can help reduce or eliminate your estate taxes too. Additionally, directing support to multiple non-profit organizations via one DAF is much easier than listing them all as separate beneficiaries. Same applies for changing charities.
Lastly, DAFs allow successor advisors to make grants too. This way your heirs can continue to support your favorite charities or ones based on their own passions.
There are many advantages of a Donor-Advised Fund and their characteristics should be explored in more depth than this blog allows. The DAF is a wonderful tool and one you should consider adding to your program. Here at Stewardship Advisors, we’ve helped many clients establish a DAF and utilize it in meeting their charitable giving needs. We’re currently managing millions of dollars in them too. For us, it’s all part of “Walking with you on your journey.”